Minimize Legal Risk During Internal Investigations

Posted on Wednesday, April 25, 2018

Let's say an employee tips you off that some payments to a vendor seem suspicious. After looking into it, your company discovers that $60,000 in payments were all authorized by one employee and no one else in the purchasing department has heard of the vendor. You become concerned about fraud. What should you do? Clearly, you need to start some sort of investigation to determine if there is fraudulent activity going on.

You might think it's best to hand the matter over to the HR department and let them look into the matter from every angle but that could be a mistake.

Successful employee fraud investigations require considerable expertise, time and patience. If they aren't handled properly, they can expose your business to lawsuits by employees alleging defamation, discrimination and privacy violations.

Internal fraud investigations are sensitive endeavors and often involve unraveling complicated financial transactions. Here are seven recommended best practices that can help minimize your company's legal liability and lead to a successful outcome:

1. Consult with your attorney. The laws governing corporate fraud investigations are complex and in constant flux. Explain the suspicious circumstances to an attorney with experience in helping investigate suspected fraud. Consult with the attorney throughout the inquiry to help ensure your company adheres to laws governing employee rights, rules of evidence and investigative techniques.

The situation becomes even more complicated if the alleged fraudster works for your company in a foreign country. International employment laws vary widely, so consult with an employment law attorney in that country. 

2. Determine that grounds exist to launch a formal investigation. Your attorney should be consulted here because launching an inquiry with insufficient grounds not only wastes company resources, it can also create embarrassment and open up your organization to legal liability. 

3. Set up an investigative team. Depending on the scope and complexity of the inquiry, the team should include representatives from the internal audit, human resources and security departments, as well as members of management. You may need a forensic accountant. Each person involved brings specific expertise to the investigation. 

4. Develop a theory of the fraud. The investigative team should brainstorm ideas about what may have happened. Coming up with a fraud hypothesis often generates a more informed, well-thought-out theory than limiting the discussion to the opinions of one or two individuals. 

5. Don't rush to judgment. Resist pressure to resolve the issue quickly. Neither the investigative team nor anyone in the company should reach any conclusions until all the facts are gathered, analyzed and understood. Failing to pursue a rigorous investigation can lead to crucial facts being overlooked or ignored. Moreover, moving too quickly may mean you miss uncovering the full scope of the fraud. There could be co-conspirators who go undiscovered and learn more about avoiding detection in the future. 

6. Don't violate an employee's expectation of privacy. Accessing an employee's office, e-mail and mail are subject to different expectations of privacy. Depending on the circumstances, violations can lead to civil or criminal litigation. 

7. Share information on a need-to-know basis only. This is critical because if the fraud allegations are not substantiated and the company's suspicions were freely shared, the employee could allege defamation or slander. In addition, if information about the probe spreads, the suspect and any co-conspirators may find out about it and try to destroy evidence.

Conducting an internal fraud investigation requires careful planning and guidance from qualified professionals. Handling allegations correctly increases the likelihood that the inquiry will be successful and that your business won't be exposed to lawsuits.

Posted in Fraud & Forensics Group

Disclaimer: The information contained in Dulin, Ward & DeWald’s blog is provided for general educational purposes only and should not be construed as financial or legal advice on any subject matter. Before taking any action based on this information, we strongly encourage you to consult competent legal, accounting or other professional advice about your specific situation. Questions on blog posts may be submitted to your DWD representative.